At closing OXGN will place an additional 8.5M shares of common stock in escrow to be released to VXGN stockholders contingent upon certain events over the 2 year period following the closing. Those events are the settlement of VXGN’s obligations under its lease of facilities in South San Francisco and the awarding of a procurement contract by the U.S. government to Emergent BioSolutions for which VXGN is eligible to receive certain milestone and royalty payments.

Of the 8.5M shares placed in escrow 2.7M shares are for the settlement of VXGNs lease facility obligations. The remaining 5.8M shares will be released if within two years following the closing of the transaction VXGN becomes entitled to receive a $3M milestone payment from Emergent BioSolutions. If the milestone is achieved VXGN shareholders will receive a further 1.9M shares plus additional shares based on the size of the contract awarded to Emergent up to a maximum of approximately 3.9M shares. Note that OXGN will be entitled to receive additional milestone payments and royalties from Emergent for a period of 12 years from commercial sale with no obligations to issue additional shares to VXGN stockholders.

The fact that the deal was done at a discount to VXGN’s $0.70 close Wednesday and at a substantial discount to its $0.77 – $2.00 value in liquidation is frustrating. Perhaps most concerning, though, is the restriction on VXGN seeking a superior deal, clearly inserted to hamstring Value Investors for Change and the VaxGen Full Value Committee, the two competing alternate slates of directors for election to VXGN’s board. Here is the restriction in full:

The Merger Agreement contains certain termination rights for both VaxGen and OXiGENE, and further provides that, upon termination of the Merger Agreement under specified circumstances, including by VaxGen to pursue a superior transaction, as defined in the Merger Agreement (including a liquidation), or by OXiGENE to pursue a financing transaction with net proceeds of least $30 million, either party may be required to pay the other party a termination fee of $1,425,000 and to reimburse the other party’s expenses up to $325,000. In addition, in the event that VaxGen effects a liquidation within 180 days of the VaxGen special meeting of stockholders, it will be required to pay a termination fee of $712,500 and reimburse expenses.

If the merger doesn’t go through, the board of VXGN has committed VXGN to throwing away $2.5M of cash. It’s an appalling outcome for VXGN shareholders.

About our VXGN position

We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” Management has said that, if the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.

There are two competing alternate proxy slates seeking nomination to the board of VXGN, Value Investors for Change and the VaxGen Full Value Committee. Value Investors for Change, led by Spencer Capital, filed preliminary proxy documents in August to remove the board. In the proxy documents, Value Investors for Change call out VXGN’s board on its “track record of failure and exorbitant cash compensation”:

VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.

The VaxGen Full Value Committee comprising BA Value Investors’ Steven N. Bronson and ROI Capital Management’s Mark T. Boyer and Mitchell J. Soboleski, intends to replace the current board with directors who will focus on the following objectives:

1. Returning capital to [VXGN]’s shareholders, including an immediate distribution of $10,000,000 in cash;

2. Terminating [VXGN]’s lease with its landlord, Oyster Point Tech Center, LLC, and settling with the landlord the obligations of [VXGN] on the remaining lease payments;

3. Exploring ways to monetize [VXGN] as a “public shell,” including the utilization of [VXGN]’s Substantial Net Operating Losses; and

4. Protecting for the benefit of shareholders royalty payments receivable from the sale of [VXGN]’s intellectual property.

BA Value Investors had previously disclosed an activist holding and, in a June 12 letter to the board, called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”

VXGN is up 41.7% since we initiated the position. At its $0.68 close yesterday, it has a market capitalization of $22.5M. We last estimated the company’s liquidation value to be around $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including a “state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. The authors of a letter sent to the board on July 14 of this year adjudge VXGN’s liquidation value to be significantly higher at $2.12 per share:

Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.

The sale to OXGN in detail

The terms of the deal were announced by OXGN in the following press release:

OXIGENE TO ACQUIRE VAXGEN IN A STOCK-FOR-STOCK MERGER

Acquisition to Add Approximately $33 Million in Cash to OXiGENE’s Balance Sheet

Conference Call Today at 9:00 AM Eastern

SOUTH SAN FRANCISCO — OCTOBER 15, 2009 — OXiGENE, Inc. (NASDAQ: OXGN, XSSE: OXGN), a clinical-stage, biopharmaceutical company developing novel therapeutics to treat cancer and eye diseases, and VaxGen, Inc. [OTCBB:VXGN], a biopharmaceutical company, announced today that they have entered into a definitive merger agreement pursuant to which OXiGENE will acquire VaxGen in exchange for common stock of OXiGENE. Upon closing of the transaction, VaxGen will become a wholly-owned subsidiary of OXiGENE, and VaxGen stockholders will become stockholders of OXiGENE.

At the closing of the transaction, OXiGENE will issue approximately 15.6 million shares of common stock in exchange for all outstanding shares of VaxGen’s common stock. The number of shares issued at closing will be subject to adjustment if VaxGen’s net cash, as of a date shortly before the closing, as agreed by both parties, less certain expenses and liabilities, is greater or less than approximately $33.2 million. Based upon the shares of common stock of OXiGENE and VaxGen currently outstanding and assuming net cash at closing equals the target net cash, the stockholders of VaxGen would receive approximately 0.4719 shares of common stock of OXiGENE for each share of VaxGen common stock. VaxGen currently estimates that its net cash at closing may be below the target amount of net cash, depending on the timing of the closing and the amount of VaxGen expenses.

In addition to the initial shares issued to VaxGen stockholders, OXiGENE will also place approximately 8.5 million shares of its common stock in escrow to be released to VaxGen stockholders contingent upon the occurrence of certain events over the two-year period following the closing. These events relate primarily to settlement of VaxGen’s obligations under its lease of facilities in South San Francisco, and to the potential award of a procurement contract to Emergent BioSolutions (NYSE:EBS) by the U.S. Government for which VaxGen is eligible to receive milestone and royalty payments in connection with Emergent BioSolutions’ May 2008 acquisition of VaxGen’s recombinant protective antigen (rPA) anthrax vaccine product candidate and related technology.

Immediately after the closing, VaxGen stockholders prior to the merger are expected to own approximately 20% of the outstanding shares of the combined company and OXiGENE stockholders are expected to own approximately 80%. If all of the contingent shares are released, OXiGENE anticipates having approximately 87 million shares outstanding. Under these circumstances, VaxGen stockholders prior to the merger would be expected to own approximately 28% percent of the outstanding shares of the combined company and the current OXiGENE stockholders would be expected to own approximately 72% percent, assuming no further issuances of stock by OXiGENE.

“OXiGENE’s mission is to develop new and improved therapeutics based on our vascular disrupting agent (VDA) technology that has the potential to deliver significant medical benefits to patients with cancer and sight-threatening eye diseases and conditions. We believe these programs will be significantly strengthened by the addition of approximately $33 million of cash,” said Peter Langecker, M.D., Ph.D., OXiGENE’s interim Chief Executive Officer. “This transaction represents a timely and efficient strategy to strengthen our cash position and fund operations into 2011. In addition to the benefit of an immediate infusion of significant cash which strengthens our ability to fund our clinical development programs, we believe that there is potential upside in this transaction in the form of milestones and royalties should the rPA anthrax vaccine be selected for government stockpiling. We want to welcome our prospective new stockholders and board members and look forward to their support and sharing our progress with them.”

“We believe that this merger transaction with OXiGENE represents an excellent strategy to maximize the value of VaxGen’s remaining tangible and intangible assets and to provide our stockholders with the opportunity to participate in OXiGENE’s potential success as a leader in the development of promising new agents for cancer and eye diseases,” said James Panek, President of VaxGen.

The merger agreement has been approved unanimously by the boards of directors of both OXiGENE and VaxGen. The merger is subject to customary closing conditions, including approval by both OXiGENE’s and VaxGen’s stockholders. As of June 30, 2009, VaxGen’s unaudited cash, cash equivalents and marketable securities balance was approximately $36 million and its liabilities and contractual obligations consisted primarily of costs and expenses of its outstanding leases related to its former biopharmaceutical manufacturing operations located in South San Francisco, CA.

Upon the closing, two members of VaxGen’s board of directors will be appointed to OXiGENE’s board of directors: Lori F. Rafield, Ph.D., a consultant to the biotechnology industry, and Franklin M. Berger, a former biotechnology analyst.

The transaction is expected to be completed in the first quarter of 2010. OXiGENE is receiving a fairness opinion in this transaction from Houlihan Lokey, and VaxGen is receiving a fairness opinion from Aquilo Partners.

Details of the Proposed Stock-for Stock Transaction

Upon closing of the transaction, based upon the anticipated net cash balance of VaxGen at closing and the current number of OXiGENE’s common shares outstanding, OXiGENE will issue approximately 15.6 million shares of newly issued common stock, subject to adjustment as set forth in the merger agreement, in exchange for all of VaxGen’s outstanding common stock. All of VaxGen’s outstanding stock options will be canceled immediately prior to the closing and all of VaxGen’s outstanding warrants, to the extent not terminated prior to the closing, will be assumed by OXiGENE. OXiGENE will also place an additional approximately 8.5 million shares of newly issued common stock in escrow to be issued contingent upon certain occurrences over the two-year period following the closing.

Of the 8.5 million shares placed in escrow, approximately 2.7 million shares relate primarily to the potential settlement of VaxGen’s lease facility obligation. If the outstanding lease obligation and related costs are reduced either before the closing or during the two-year period following the closing, OXiGENE will release additional shares from escrow to the VaxGen stockholders depending on the amount of the lease settlement arrangements.

The remaining 5.8 million shares to be held in escrow will be released to VaxGen’s stockholders in the event that VaxGen (as a subsidiary of OXiGENE), within two years following the closing of the transaction, becomes entitled to receive a $3 million milestone payment from Emergent BioSolutions in connection with the award of a procurement contract to Emergent by the United States government for supply of rPA anthrax vaccine. In the event this milestone is achieved, OXiGENE will release from escrow approximately 1.9 million shares, plus additional shares based on the size of the contract awarded to Emergent. OXiGENE will be entitled to receive additional milestone payments based on net sales as well as royalties from sales of rPA anthrax vaccine for a period of 12 years from commercial sale, with no obligation to issue additional shares to VaxGen stockholders. If the award of the procurement contract is announced prior to the closing, VaxGen will receive credit for the $3 million milestone payment in calculating net cash at closing, and OXiGENE will issue to VaxGen stockholders at the closing additional shares based on the size of the contract awarded to Emergent.

In connection with the Merger Agreement, VaxGen entered into voting agreements with OXiGENE and certain executive officers, directors and stockholders of OXiGENE, and OXiGENE entered into voting agreements with VaxGen and certain executive officers and directors of VaxGen pursuant to which these parties agreed to vote in favor of the adoption of the merger agreement and against approval of any proposal opposing or in competition with the consummation of the Merger.

If you’re into self-flagellation, read the transcript of the call and weep over the lack of questions about the terms of the deal or whether it’s good for VXGN’s shareholders.

Hat tip Jim Hodges.

[Full Disclosure: We have a holding in VXGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

93 Responses

[…] biotech play, it’s a real dud for VXGN shareholders (see our more detailed take on the terms of the VXGN / OXGN deal). A successful outcome in any litigation may be a Pyrrhic victory for participating VXGN […]

i was just noting that it has sold off to senseless levels as value investors hit the exit — all at one time. What happened to value investor rationality? ironically, the sell-off value investors have invoked should actually get the attention of value investors.

I have held my position, which has caused a mild pain in my kidney area, but if i had the excess capacity in the portfolio, I would be loading up here.

my only question is, loading up for what though; i mean, i’m contemplating it, but it just seems that what little value may be left here is being squandered away. forgetting what i’m sticking around for :\

Anyone loading up on this stock or still owns this stock is putting aside their rational judgment because they either love this company or they can’t accept defeat. If you used a margin of safety during the initial purchase of this company, it’d be wise to get out. Regardless of the outcome of litigation, it is going to cost VaxGen money, and large amounts of it, in order to defend themselves. That is going to have a significant impact of their financial position. The merger agreement was to exchange X amount of shares for X amount of dollars. After hiring an attorney, if they no longer have X amount of dollars, 1) the merger isn’t going to take place, 2) VXGN will owe money to OXGN for breaking the agreement, 3) and the asset value per share will be significantly less. I’m estimating around $0.15 per share.

As an interesting historical note, in November 2007 Vaxgen announced another disastrous merger agreement with Raven Biotechnologies. Over the next few days their stock price fell nearly 50%. The merger was then terminated the day before the special meeting due to perceived shareholder opposition. It’s unclear to me why the board thinks this attempt will have a different outcome.

What are the downside / upside of signing up for the lawsuit? I have never experienced this (class action lawsuit against Board of Directors) before, and would really appreciate if someone can provide some clarification as to what the process is.

I wouldn’t get overly excited about this lawsuit. Think about the incentives involved. The law firm isn’t doing this because they’re nice guys – they expect to collect fees for their trouble. Any fees are going to come from Vaxgen and reduce eventual payments to shareholders. In addition, Vaxgen will be forced to hire lawyers to defend themselves, spending even more shareholder money.

The merger being voted down and the board being replaced is a much better outcome than anything likely to result from a lawsuit (IMO).

BA Value and ROI are the sponsors of the proxy fight. Note that the ownership percentages in the proxy are slightly lower. The numbers here include some shares owned by the principals directly rather than through the fund.

Weiss also owns shares in Leadis and Footstar, two other liquidations.

The percentile that ROI and BA Value is exactly as I said it was. Combined, they hold 13.72% of the company based on the most recent filings directly from the SEC website. No information available to the public is more current than from the SEC themselves.

LOL, you’re not worth my time cupcake. I like to contribute as much as I can. Often I’m right because I do my homework but there are some instances where I’m missing pieces of the puzzle. If you don’t like my style, get over it.

Based on further research, I believe the liquidation value of VXGN is now $1.31 per share.

My valuation includes discounts made due to severance package(s), Merger Cancellation Clause, A presumed 2 year lease obligation, and $33.2 Million in Cash as well as hard assets appraised by Value Investors for Change.

Half of the value is made up of cash = $0.49 P/S
Half in hard assets = $0.82 P/S

The hard assets were assigned a value of $1.09 by a value investor group. I’m assuming since they invest from a fundamental view that, that number is conservative. I feel it is at least as strong as any receivable and have discounted it as such.

The more and more I look at this situation the more I realize just how badly the management of VXGN blatantly screwed its shareholders. Folks, when this is all over, please please please learn who these people are and NEVER do business with any business they represent again.

Most discussions here is about the assets but not about liabilities! For OXGN who needs cash in near time a $2.5 yearly lease liability is no problem. But for VXGN this is the biggest obstacle to be able to voluntary liquidate the company.

The 10-K stipulates that the “non-cancelable operating lease” liability is:

A ‘non-cancelable’ operating lease. LMAO. I can’t say that I’ve heard of that one before but its nontheless funny. To say that there is such a thing that exists is ridiculous. No further argument needs to be made. You’re a speculator and not a very bright one at that. In a matter of a few months, we shall see who has done his homework :)

VI, I used the quotation marks just because it was an accurate quote from the 10-K. You keep attacking me as a person and avoid dealing with facts and reality.

From page 45

“13. Commitments and Contingencies
Leases
VaxGen leases office facilities under a non-cancelable operating lease in South San Francisco, California, which expires in 2016.
In April 2005, VaxGen entered into an amended lease agreement, or Lease Amendment I, to replace two previous leases, including a lease for 20,000 square feet of laboratories and office space and a sublease for 50,000 square feet of manufacturing, laboratories and office space. It also provides an additional 35,000 square feet of new space. Lease Amendment I secured space to support the production of its recombinant anthrax vaccine candidate as well as its other programs. Lease Amendment I terminates in December 2016; however, VaxGen has options to renew the lease for two additional five-year periods. In connection with Lease Amendment I, an amended letter of credit in the amount of $2.4 million was issued to the lessor. The amended letter of credit is collateralized by a certificate of deposit held by the bank that issued the letter of credit. In addition, under Lease Amendment I the Company received $2.2 million in reimbursements for the costs of certain tenant improvements.”

Every lease can be settled. If a sudden change in the company prohibits it from keeping to the agreement, there isn’t a court that is going to make a publicly held entity keep the agreement. If a company liquidates itself, most often the lease agreement stops. This is how ‘business’ works. Just because an item has a retail price tag of $20 for it doesn’t mean that you can’t talk to the shop owner and get it for $15. It’s called negotiating and it happens across the world on a daily basis.

If the lease couldn’t be terminated and the merger goes through, explain to me how OXGN will be in a better position by acquiring a lease obligation.

I’d like to see your valuation of OXGN WITHOUT any crystal ball that ASSUMES their drug will pass FDA inspections. I’d like to see a value from you based on what they’ve done and what they are doing now. Please enlighten me.

Why are you using a one year old 10K filing to argue your point about a subject that has been addressed lately and the circumstances of which have changed? From the most recent 10-Q filing:

“In February 2009, a lawsuit was filed against us in the Superior Court of California for the County of San Mateo by plaintiffs, Oyster Point Tech Center, LLC. The plaintiffs generally allege that we defaulted on our lease for our facility located at 349 Oyster Point, South San Francisco, California. The complaint seeks possession of the premises and the balance of the lease plus unpaid rent and expenses totaling $22.4 million, as well as an award of plaintiffs’ attorneys’ fees and costs. Our biopharmaceutical manufacturing facility is located in the leased premises that are the subject of the dispute. At a February hearing, the court denied the writ and the temporary protective order sought by landlord. In May 2009, the lawsuit was dismissed.”

DISMISSED. You can’t sue someone or something in a court of law more than once. The lease agreement has already been ruled on and the results are that VaxGen DOES NOT have to pay $22.4 million to the plaintiff. So, the scenario you have proposed is not a valid one any longer. If you used latest information, you’d know that instead of trying to scan back an entire year ago to try and find a document that supports your claim :) Its a bit pathetic really.

Anyway you look at it, OXGN is overvalued. Even if you took their stated book value:

$8.92 M + $13.08 = $22 / 78.05 M shares = $0.28 P/S book value.

Anyway you look at it, OXGN is overvalued. You can’t do a cash flow projection or an earnings projection or any other kind of projection on a company that doesn’t have any revenue. It’s impossible. How do you value the business then? By its assets. Companies are known to overstated their value, especially a company who doesn’t earn anything. But, even if we were to take their stated BV at face value, they still aren’t worth anything.

So, how exactly will the merger be good for OXGN? It isn’t good for either company. Although, its better for OXGN than it is VXGN, that really doesn’t say too much given that OXGN is an over inflated company.

I argue that the true intentions of this transaction is to allow for an annual pay check to individuals and produce to effort for that pay check in return. The management of both companies are trying to find ways of earning a living at the shareholder expense. Nothing less, nothing more. And YOU bought into it.

I argue that the true intentions of this transaction is to allow for an annual pay check to individuals WHO produce NO effort for that pay check in return. The management of both companies are trying to find ways of earning a living at the shareholders expense. Nothing less, nothing more. And YOU bought into it.

$1.47 x .4719 is indeed $0.69 per share rather than $0.65 per share and if you payed attention to what I wrote, you’ll see that I said I meant $1.47 and not $1.37 as I wrote. A very easy mistake to make that I made note of.

I’ve never known ANY company in existence that you could take a simple mathematical equation to, such as $1.47 x .4719 = $0.69, and receive its intrinsic value. Obviously you believe that a simple one formula mathematical equation will do that for you. It’s not me who is incorrect, it is you.

Furthermore, You used VNDA as an example trying to compare its circumstance to OXGN & VXGN’s circumstances. I owned and profitted from the VNDA deal. There wasn’t one characteristic that VNDA had in common with either OXGN or VXGN.

plus: if lease settled for less than 6.6mm, 1,972,548 shs released, (net lease liability shares), which comes to an additional .09, so a total of .73. I’m not including any other releases of shares.

So short term, vaxgen holders have an option on OXGN. For instance, OXGN will be presenting phase 2 study of Zybrestat at a conference Nov. 15th to 18th. Point is, If OXGN pops for any reason before the VXGN shareholder vote, (they have 3 drugs in trials) approve the deal. If stock tanks before shareholder vote, vote down the deal.

First, your initial calculation is incorrect. Read the fine print of the agreement. Every VXGN shareholder will receive .4719 of $1.37, not current market price. Per share it comes to $0.65 per share.

Second, you’ve got too many ‘what ifs’ you’re relying on. If most value investors are like me, which many I’ve been associated with here seem to be, ‘what ifs’ don’t matter to us.

Thirdly, OXGN is NOTHING remotely close to VNDA. VNDA was a net-net company, had an activist investor, and the board didn’t need to be threatened with a proxy fight; they said right from the beginning that if their drug didn’t receive FDA approval that they would immediately liquidate the company to the shareholders. VNDA had a very competent and classy management team. Nothing remotely compared to OXGN or VXGN.

Bohnny Knoxville, I never said a damn thing about options. Open your ears. If you did your own research to begin with, you wouldn’t be asking stupid questions such as “when is the shareholder vote on the merger?”

Steve, Here’s the text.

I meant $1.47 not $1.37 and although the agreement states:

“The Company currently estimates that its net cash at closing may be below the target amount of net cash, depending on the timing of the closing and the amount of Company expenses. The actual exchange ratio will be determined immediately prior to the closing of the Merger.”

It also states:

“In addition, OXiGENE has agreed that it will not issue or sell any securities except either (i) pursuant to existing stock option plans or existing OXiGENE warrants or (ii) in a financing transaction of no less than $30 million at a purchase price of no less than $1.46 per share during the time between the execution of the Merger Agreement and the consummation of the Merger.”

VI,
I believe the language you refer to is a clause which restricts what OXGN can do between now and when the actual merger becomes final with respect to other financing transactions. It doesnt have anything to do with the actual terms of the exchange ratio for the merger with VXGN.

The proposed merger fixes the ratio of shares. It doesnt fix a dollar amount and then change the number of shares that VXGN shareholders receives if the OXGN share price changes (except to the extent cash in the company is less than the $33m+ amount)

“depending on the timing of the closing and the amount of Company expenses. The actual exchange ratio will be determined immediately prior to the closing of the Merger.”

This verbiage makes your statement correct. My statement regarding the $1.47 price really didn’t have anything to do with valuation. I was trying to find a correlation between value and the $1.47 per share price even though I misprint $1.37 rather than $1.47.

Regardless, my valuation of OXGN @ $0.65 per share comes from an asset valuation. Not a single factor number. You can’t arrive at an intrinsic value with a single factor number and that was really the point I’ve been trying to make. Obviously, some of you aren’t value investors and rely more on speculation than a fundamental philosophy.

Here is the breakdown again that I stand by:

$33.2 Million in cash – $5.74 Million in total liabilities = Market Cap of $27.46 Million – $3.7 Million lease termination / 33.11 Million shares = A Cash Valuation of $0.72 per share + $1.09 per share valuation of hard assets that was released last quarter from the research the activist investors put together.

Final valuation for VXGN without the merger equals:
$1.81 per share (I initially wrote $1.84 when in fact it should be $1.81).

Because of this merger situation now, VXGN will give $33.2 Million of its cash for the exchange of 15.6 Million newly created shares of OXGN.

OXGN has $20.67 in cash bringing their cash balance to $53.87 Million. OXGN also has $13.57 Million of Total Liabilities. Which leaves a balance of $40.30. OXGN currently has 46.20 million shares. Add another 15.6 newly issued shares which brings the total to 61.80 Million shares.

$40.30 / 61.80 = $0.65 per share valuation for OXGN

VXGN value: $1.81 per share
OXGN value: $0.65 per share

This is how you come to a valuation, not by way of a ratio and a bunch of ‘what ifs’.

Furthermore, the $1.09 figure comes from a value investor group who has a more direct access into the assets of the VXGN business than any of us do because they play an activist role. Here’s what they have to say about the valuation of VXGN:

“Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.”

To further expound on what I previously wrote for the sake of some who get confused:

VXGN value WITH NO MERGER: $1.81 per share
OXGN value WITH THE MERGER: $0.65 per share

OXGN’s net-net value currently, without a merger, is only $0.15 per share. OXGN is currently trading at $1.36 per share. OXGN hasn’t produced a dime of revenue since 2003. It’s the PERFECT company to short. Regardless if the merger goes through or not, they are currently WAY OVERVALUED. Years of operating in the red. No positive net income, no revenue, No increase in book value, no nothing to be frank.

There is no investor that can say without a smirk on their fact that this is a good deal for VXGN. Only a speculator with visions of sugar plums dancing in their heads could make that argument.

“The advantage for VXGN shareholder with this deal is that they get a tradable share that has the potential to return your investment.”

Yes, the potential to throw good money after bad. The potential fail to develop a product and liquidate. The potential to reach clinical milestones on the product development.

Oh wait…been there done that. Potential works both ways. If OXGN was such a great investment VXGN shareholders could certainly make an investment with their liquidation proceeds. Nobody needs a BOD with questionable judgment making the decision for them.

And then from Jim Panek on the conference call: “First, this transaction appropriately values VaxGen’s most tangible asset, its cash and it puts to use in a way that has the potential to drive stockholder value. ”

I could put it to use and drive long term value without having to worry about the potential.

It is a miscarriage of fiduciary responsibility to sell for less than the current share price and less than the liquidation value of the company. I was not able to acquire all of the shares I sought to buy so my position is relatively small. I certainly would support anyone who would continue with a competing proposal to liquidate.

This is what happens when you have management and a BOD who are not owners making decisions.

Value Investor, seems like the majority of us think along the same lines: This is bogus and is likely to be voted down, unless many value investors have begun dumping shares. If this is indeed rejected, do you have comfort that the Board will not just repeat this story all over again, thereby extending their severances packages and screwing you?

The shareholder vote for both the proxy fight to replace the board and liquidate the company as well as the merger agreement will take place at the next annual meeting. If the majority of investors vote in favor to replace the board, VXGN will not have another opportunity to do anything. They’ll be kicked out and will have no say in anything that happens to the company. Approximately 25% of the votes are secured by value investors that this will happen. There isn’t many votes needed to finish the job. I’m gathering that the majority of VXGN’s shares are owned by value investors and if that’s the case, which I strongly believe is, the board will be replaced sometime in December during the next annual meeting.

I think one thing being omitted from our analysis is the relative competency of the boards and management of VXGN and OXGN. If this crazy merger actually passes, the VXGN shareholders will a least inherit a smarter leadership.

From OXGN point of view they are buying $33m in cold hard cash for $25.1m in stock, equivalent to doing a private placement of shares at a 32% PREMIUM. And this premium is protected because the price effectively rachets down to $21.4m if the lease liabilities they are inheriting (mainly the rent liabilities which represent $4.9m of the $5.7 total liabilities on balance sheet) are not favorably settled.

I think the omission is on purpose, at least from my point of view. VXGN has always produced revenue, regardless of the amount. OXGN hasn’t produced revenue since 2003. Aside from the fact that OXGN got the better end of the deal, the jury is still out if it was due to negotiations or more of a ‘business arrangement’. Don’t forget, OXGN is inheriting two additional board members from the VXGN management. They’ll be able to continue getting paid and continue not having to work. Pretty sweet deal. I think that is really the motive behind this decision. I wouldn’t use the word ‘competent’ to describe either company’s. This is blatant thievery but lucky for us, I highly doubt this deal will get approved. A very large majority of the company is owned by value investors.

You’re so far off on liquidation value and your logic that I wouldn’t even know where to begin with you. The last 10-Q filed by VXGN stated that they have $35.56 Million in cash. The latest press release give light that they now have $33.2 Million in cash.

If we took just that amount, without accounting for the value of their hard assets which have been valued at an additional $1.12 per share by a professional ‘valuation’ business, we come to this:

$33.2 Million in cash
Minus
$5.74 Million in total liabilities
equals
A Market Cap of $27.46 Million
Minus
$3.7 Million lease termination
Divided by
33.11 Million shares
Equals
A Cash Valuation of $0.72 per share
Plus
$1.12 per share valuation of hard assets that was released last quarter from the research the activist investors put together.
Final total equals:
$1.84 per share liquidation value for VXGN

Because of this merger situation now, VXGN will give $33.2 Million of its cash for the exchange of 15.6 Million newly created shares of OXGN.

OXGN has $20.67 in cash bringing their cash balance to $53.87 Million. OXGN also has $13.57 Million of Total Liabilities. Which leaves a balance of $40.30. OXGN currently has 46.20 million shares. Add another 15.6 newly issued shares which brings the total to 61.80 Million shares.

$40.30 / 61.80 = $0.65 per share valuation for OXGN

VXGN value: $1.84 per share
OXGN value: $0.65 per share

Is $1.5M worth the trouble? LOL. You don’t have a damn clue to what you’re talking about.

Each shareholder of VXGN shares will receive a .4717 factor a share of OXGN at exchange price of $1.37 per share which equates to $0.65 per share. You can factor the transaction that way and it equals exactly the long handed version of valuation of OXGN shares. Anyway you look at it, OXGN will not be worth more than $0.65 per share and is currently worth pennies on its own merit. Its the perfect stock to short which I have every intention of doing in very large quantities.

I understand that you think the deal is crappy by adding a $1.12 per share hard assets. But I question the valuation of the assets as I doubt you will be able to transfer the assets to cash. I also doubt any company are willing to pay that sum.

Putting a value as high as $1.84 on VXGN shares will give current shareholders false expectations of what they could expect to get paid by a new management. This is only theoretical sum that has no practical implication.

But I start to think it´s not the valuation that is the issue here IMO! It is the control over $33M in cash!

No sir, you are getting your valuation from an outdated article that MY PERSONAL FRIEND and the author of Greenbackd wrote long BEFORE the current merger information came out. Everything, including the valuation, has changed now my friend. Feel free to ask him yourself :) Maybe you should learn how to do your own valuations and you won’t have to rely on other people for information.

“The Merger Agreement contains certain termination rights for both VaxGen and OXiGENE, and further provides that, upon termination of the Merger Agreement under specified circumstances, including by VaxGen to pursue a superior transaction, as defined in the Merger Agreement (including a liquidation),…”

Funny how a liquidation is defined to be a “superior transaction” in the Merger Agreement.

Another way to look at this deal is that at OXGN share price of $1.37, the offer represents:
(1) 15.6m shares or $21.4m upfront plus
(2) 2.7m shares or $3.7m if lease is terminated plus
(3) 5.8m shares in 2 years if the Emergent payments come through.

Add that together and you get $33m….PRESTO…the same amount of cash that OXGN is getting UPFRONT in the deal.

so why are we exchanging $33m in cold hard cash for the potential to earn $33m in stock if everything works out for the best in 2 years time?

How can a fairness opinion be prepared for this with a straight face??

Excuse me, you’re a long term investor like many of us? I hardly doubt it. ‘Long Term’ doesn’t have a thing to do with US. We’re value investors. The length of time we hold a stock in order for it to reach its intrinsic value has nothing to do with ‘HOW’ we invest.

Especially if you’re invested in OXGN, you’re NOTHING like US. OXGN is an overvalued piece of garbage with nothing to offer currently.

You make the comment: “OXGN has not yet delivered on it´s potential but we are close to some very important clinical data presentations.” Well let me explain to you:

1. OXGN has not produced a positive net income in more than 10 years.

2. OXGN hasn’t produced a dollar in revenue since 2003.

3. OXGN hasn’t produce a gross profit since 2003.

It isn’t that they haven’t delivered on it’s potential, its that they currently have no potential. One thing you’ll find about US is we don’t speculate. We don’t guess. That is an area where you are not relatively close in style to US.

I’m personally offended by some OXGN shareholder coming to the board and saying that because he invests ‘Long Term’, he automatically assumes he invests like US. If you purchased OXGN, trust me, you’re nothing like US.

No MID, that is not a fact and you’re wasting your time by coming to a value investing website in which the majority who visit this site are mathematicians and a large part of their job is to analyze the numbers of a business.

You’re actually coming to us saying that after the merger, the financial position of OXGN will be stronger than what VXGN’s current financial positions is? LOL!!!

I’m not going to explain to you how you are incorrect on so many more levels than just one because most of the people who read these posts will get as good of a laugh from that as I am now and I rather not TEACH you how to value a business. So, for that reason alone, I’m not pointing out your flaws. Nothing to say other than LMAO!!!!

A few point I’ll point out to you that a) don’t make sense and b) just plain stupid.

You said: “If liquidating VXGN it will take time before you have cash in your hand.”

Answer: WRONG. You can liquidate cash immediately because you don’t have to ‘turn’ it into anything. It’s in CASH. Hence the word……CASH. When a company goes into liquidation, most often times they IMMEDIATELY release the CASH. I don’t you obviously don’t know anything about what’s been going on with VXGN, but a few investment groups who will most likely win their proxy fight and liquidate this company has already committed themselves to IMMEDIATELY returning CASH to the shareholders.

You said: “IMO is there no way the current management or a new management could increase the return to VXGN shareholders higher than the deal with OXGN.”

Answer: As I’ve clearly stated, your opinion means very little to me. You don’t know anything about the assets of VXGN. Your a speculator not an investor and you’ve probably never read a financial statement or an SEC filing in your life. I also will not go into detail to explain to you just how much VXGN’s assets are worth.

You said: “Liquidating a company costs money and takes a long time, a merger cost far less and is much faster.”

Answer: WRONG. When a company is made up mostly of cash, it doesn’t cost anything to liquidate the business because all a company has to do is return the cash to the shareholders. There’s no transfer fee’s, no auction fees, no sales fees, no fees to do that. Furthermore, I doubt you know what the costs are to anything. You purchased a company that hasn’t produced an income in over 10 years and has TWICE as much DEBT as what their equity value is. You obviously enjoy paying quadruple for something an intelligent person would pay a discount for.

You’re in the wrong investing site. You’re much better off posting on google or yahoo where they don’t have a clue as to what they’re doing either. You’ll have something in common with them. Good luck.

VI, I wouldn’t get such a huge head over your hot run this year. Your covestor account is pretty cool, and I’m glad you’ve done well but it still shows < $50k in assets so I dunno I don't think it's some crazy huge brag or any kind of track record at all really.

I don’t think I need any advice from someone I don’t know. I own 3 brokerage accounts. I have 1 that is connected to covestor. That particular account does have less than $50,000 in it and its not too far from hitting $50,000. That account was started in November of 2007 with exactly $1,100. It is over $30,000 and has been increasing an average of $5,000 per month for several months now. There is nothing ‘cold’ about my return. During the recession, I was positive and never lost a dime in either 2007 or 2008. I think I know what I’m doing :)

Furthermore, a good friend of mine who I give advice to has made a 191.xx% return thus far for 2009. NONE of the stock picks I recommended to him were the same ones I hold. They were completely different companies. Although he doesn’t have a covestor account, it doesn’t change the facts concerning his situation and the one account he works with is in far north of $250,000.

2 or 3 years does not a track record make. that’s all i’m saying, really that’s all there is to it. i’m glad some friend of yours made a bunch of money when everyone else doing deep value was making tons of money too.

Listen, we don’t know one another. For you to come to the conclusion that I have a ‘big head’ or any ‘ego’ whatsoever is highly speculative on your part. Furthermore, I’m not interested in where you’re trying to go with the conversation. It serves no purpose. Lastly, My track record has been tied to Covestor since 2007. That, however, isn’t how long I’ve been investing or have kept a track record of my performance. If you were born in 81, presuming from your screen name, I started investing when you were 10 years old. I wouldn’t presume to know anything about me if I were you. If you consider yourself a value investor, you may want to put in check your rationale for judgment.

If you’re going to be critical of my performance, remember, the only reason you have knowledge of it is because I shared my public return and made people aware of it. Where’s your return? It would be easy to say I made this or that like so many speculators do without having any physical proof of it. It’s also a poor character flaw that some suffer from by criticizing another person’s performance without having the integrity of making his own performance public information. So, if you want to criticize, be a man and show us your return.

I have never attacked another value investor here. The individual I was having a conversation with was a speculator who has owned OXGN for a while and comes to a value investing blog trying to convince me through advertising that the VXGN-OXGN merger is a good one. For a lack of a better term, that pissed me off for many reasons. Ben Graham was critical of the speculator. Warren Buffett has been critical of the speculator. I’m critical of the speculator. As long as the speculator exists, I will be critical of him because he doesn’t take time to simply ‘think’.

As for you, your view of me is your own character flaw and I frankly have no interest in someone I don’t know but I will defend against disinformation anytime I’m made aware of it. As long as I breathe.

It wasn’t my intention to ‘brag’. It was more my intention to back my point with a fact. First, I can’t believe that I have to defend rational logic against someone who probably reads a blinking light for a living. I have no ego, if you knew me personally, you’d quickly understand that. I also don’t hold back. I’m originally from the country. I say what’s on my mind and if people don’t like it, too bad. It’s one of the reasons I enjoy Charlie Munger so much because we share a similar style. I won’t apologize for something I didn’t intend to do but I will apologize for leaving you with that impression. Do I care, in the end not really.

Why is it so easy for the employees of VXGN (the board) to bend the owners (shareholders) to their will? If I ran a private business and a manager I had employeed tried to do this I would show them the door. Of course if they were paying themselves an exuberant salary whilst my business was valued at less than its assets in liquidation I would have fired them a long time ago anyway.

It needs to be made easier for the owners of publicly listed companies to run their business.

Yes, there definitely is that possibility BUT, if the merger is rejected, VaxGen committed themselves to paying Oxigene $2.5 MILLION of its cash. Vaxgen’s current cash position that was revealed via a press release is $33.2 Million. Subtracting $2.5 Million as well as their total liabilities leaves you with a $0.75 per share valuation of the company not taking into account their hard assets. Either way, its not going to be as good of an opportunity as it was previous to the merger announcement.

yeah, that’s def true, but i’d rather have the merger rejected, and get a potentially higher liquidation value+the shareholder distribution that was promised (@ $10mm prior) and spend $2.5mm, than have it go through and get completely screwed on the opportunity

these damn fees m&a termination fees, what a crappy deal overall for us

Yes, I think most investors who got in with a margin of safety have that desire as well. But, there are a lot of investors who purchased at $0.65 – $0.70 per share, for example, whom I imagine don’t share our sentiments. As a previous poster on this board said it best: “this is the only time i’ve been up 40%+ and i’m still pissed off about it.”

Can I ask where you found a reference to a $2.5 million termination fee? By my reading of the merger agreement, the fee is $1.4 million + up to $325k of expenses. If Vaxgen’s board decides to liquidate the company (and abandon the merger) within 180 days following the special meeting, the fee is reduced to $712k + up to $325k in expenses.

However, both fees only apply in certain circumstances. The details are described in section 8.3b of the merger agreement. The higher fee applies if Oxigene terminates the agreement per section 8.1e, Vaxgen enters into a competing merger agreement per section 8.1f, or Vaxgen settles its lease liability and then enters into a competing merer agreement.

As described above, the lower fee applies if Vaxgen decides to liquidate within 180 days after the special stockholder meeting.

What’s interesting though, is that Vaxgen is given the right to terminate the agreement if stockholder approval is not obtained (per section 8.1d). However, section 8.3 doesn’t list any termination fee due in that situation. It seems that shareholder rejection of the merger does not result in any payments to Oxigene. I’m not a lawyer though, so possibly my interpretation is completely wrong.

In my opinion, there’s very little chance of the merger receiving stockholder approval. It’s obviously a bad deal, so unless the dissident shareholders all throw in the towel and sell, it will be voted down.

What I don’t understand is how the special meeting associated with the merger affects the normal annual meeting and the dissident investors’ board nominations. Will new board members also be voted on at the special meeting ? Or will there be another standard annual meeting shortly after where board members will be elected?

You wrote: “Can I ask where you found a reference to a $2.5 million termination fee? By my reading of the merger agreement, the fee is $1.4 million + up to $325k of expenses. If Vaxgen’s board decides to liquidate the company (and abandon the merger) within 180 days following the special meeting, the fee is reduced to $712k + up to $325k in expenses.”

The verbiage is:

“either party may be required to pay the other party a termination fee of $1,425,000 and to reimburse the other party’s expenses up to $325,000. IN ADDITION, in the event that VaxGen effects a liquidation within 180 days of the VaxGen special meeting of stockholders, it will be required to pay a termination fee of $712,500 and reimburse expenses.”

Special emphasis on ‘IN ADDITION’ which means to ADD. I believe you are reading the text incorrectly.

There is a 1.2M position of shorted shares and they are working hard to create a flush out prior the phase II clinical interim data presentation on the 17th November.

Oxigene is also traded in Sweden and OXGN.ST was initially up 25% on the news before shorts started to move price back down.

The advantage for VXGN shareholder with this deal is that they get a tradable share that has the potential to return your investment. A liquidation of VXGN will only give less than current value.

I´m not trying to pinpoint the correct value on VXGN shares as I cant. Have not done that DD yet.

But looking at the share price last months it looks like someone has been trading up the value of VXGN shares.

I think the VXGN owner also should look at what they get in Oxigene. The pipeline, the BOD with Arthur Laffer and Symphony Capital top management, a share to trade on two markets Stockholm and Nasdaq and the possibility of a deal with BPh!

For every shareholder in VXGN that owns 100% of something, VXGN is proposing that you should exchange that for 20% of nothing. Regardless of the ‘ifs’ of Oxigene, right now they are not producing any revenue. Right now, they have very little cash compared to their liabilities and they are trading in far excess to that. Right now, VXGN has a lot of cash compared to its liabilities and is trading for less than that. This is a terrible deal and I hope a lawsuit happens soon.

this amongst the most flagrantly irresponsible boards i have ever witnessed and i am appalled by their actions: it seems they did this to raise the middle finger at VXGN’s shareholder base. They’ve taken and redistributed our value and should be held accountable. Oxigene board members should be ashamed of themselves for participating in such a one-sided offer. This is not the product of negotiation, especially in light of the rapacious breakage fee.

Mr. Backd, you’ve made quite clear your views; but what do you intend to do with your shares at this point?

Me? I am tempted to hold just to see what happens next. But I am pissed.